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Funding statement 2013 – flexibility is welcome but can the right balance be struck?

On 8 May 2013 the Pensions Regulator published its second annual funding statement, for scheme valuations falling in the period between 22 September 2012 and 21 September 2013.

The key message contained in the statement is that of the flexibilities that are available to enable trustees and employers to agree a long term funding plan for their pension schemes. There is also an emphasis on a requirement to find an appropriate balance between promoting the employer’s future business growth and safeguarding the scheme.

The statement highlights some fundamental ways in which employers and trustees can adopt a flexible approach when agreeing funding arrangements particularly if the employer is facing financial difficulties and these relate to:

Discount rates – there is a reminder that trustees are not limited to adopting a gilts based approach and may use future expected returns on assets, depending on what is most appropriate for the scheme.

Contribution levels and recovery plans – some employers may lower contributions and agree longer recovery plans to enable them to invest in their businesses.

Two days after the release of the funding statement a draft Pensions Bill 2013 was published in which a new statutory objective for the Regulator was revealed: “to minimise any adverse impact on the sustainable growth of an employer.” The key word is “growth” which is consistent with the Government’s message for the economy and will be welcomed by employers.

The statement calls for funding plans that both stimulate the growth of business whilst also highlighting the need to protect the interests of pension scheme members. It remains to be seen what practical effect the Regulator’s new objective will have but it is likely that the greater freedom afforded to employers to divert funds away from pension scheme deficits may well make it more difficult for trustees to negotiate an acceptable funding arrangement. The outcome may muddy the waters for both trustees and employers when striking an acceptable balance between growing and investing in the employer’s business and funding the pension scheme.

A revised funding Code of Practice to reflect the new objective is due to be consulted on later this year and it should provide further clarity on the practicalities of adopting the new flexibilities proposed by the Regulator.

What is clear is that it is important to support business growth in the current economic climate but this needs to be managed so that it does not come at the expense of the scheme. The question is however, is this a balance that can be struck?

This article was first published by Engaged Investor, the Trustee Magazine on 30 May 2013.